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Christopher Johnson: Welcome to Morningstar UK My name is Christopher Johnson. Today we’re joined by Pieter Staelens, his portfolio manager at CVC Income & Growth Trust. Thank you very much for being here.
Peter Stahrens: Thank you, Chris.
CJ: So the first question is, what is the missing link between ISAs and mutual funds?
P.S: In fact, investment trusts are perfect for ISAs. If you think about it, many mutual funds provide individual investors with access to asset classes that are generally only accessible to large institutional investors, and that’s no different for us. If you look at our investor base, the majority are institutional investors, but through this trust we are providing access to more retail investors. It’s great to be able to put that in an ISA wrapper because if we can put it in an ISA wrapper, we can provide income and growth to our investors.
CJ: According to the Investment Companies Association, the total return in stock prices reached 14.4% in the year to March 2024. So what is the key to the fund’s recent success?
P.S: We had a very strong year. And if you look at 14.4%, that doesn’t include the dividend because it’s currently paying a dividend yield of about 9%. So the all-in return to investors last year was great. And what drives it? That’s the high income we’re getting from the loans we’re currently investing in. This is partly due to a significant increase in base rates. So as inflation rose, the central bank raised the base interest rate and that was actually reflected in the income that we were generating with the fund. On top of that, the fund has more credit opportunities and has performed incredibly well over the past 12 months as well. If you think about the last 10 years or so, central banks have been doing quantitative easing and keeping credit spreads tight, so what you get before and now is because central banks have stepped back and not been doing quantitative easing. Coupons were much lower. There are now a lot of interesting opportunities that we can look at, and that’s great for investors.
CJ: Superalloy manufacturer Doncasters is the top issuer at 5.41%. So why this company?
P.S: This is a company we’ve been following for many years and it’s the same across platforms. Many of the companies we finance have been tracked for many years. And at some point, the loans were offset and we were able to purchase some of these loans at a significant discount to face value. Of course, things didn’t work out as planned. And we had to do a financial restructuring of the business, so we actually ended up owning equity in the business. And we spent a lot of time looking at business. We installed a new board of directors, a new management team, and the company’s revenue actually grew significantly. The stock’s valuation has increased significantly over the past few years, and we are confident that the company will continue to grow its earnings. Therefore, we believe this position has further upside potential. So what was previously a small position actually grew into a much larger position over time due to the growth in the stock price of the business.
CJ: So how are you involved with the change in team management at Doncasters?
P.S: The previous owner of the business had internal problems and was unable to repay the loan when it came due. And, similar to what banks do, if they were unable to repay their mortgage, we essentially enforced collateral and effectively took over the business as a group of lenders. And through that, we installed a new board of directors, installed a new management team and are now effectively managing the business.
CJ: Another publisher I wanted to ask a little bit about is Hotelbeds, a Spanish company. Can you talk about that?
P.S: Yeah. So Hotelbeds is a business that we invested in during COVID. So obviously business has been affected by COVID-19. So they are B2B operators. So if your hotel has a spare bedroom, you can add it to the Hotelbeds system. Travel companies can then check that system to see which hotels have availability. Therefore, they have effectively become an important part of travel infrastructure. And because they are so important to both clients and suppliers, we thought this would be a business that would emerge from COVID-19 in better shape. Of course, there were challenges for business due to COVID-19. There was cash burn and all that. However, the valuation of the business was much higher than the debt we were investing in, and we were reassured that the business would emerge stronger from the coronavirus crisis. And it actually worked very well. The business is currently generating higher revenues and EBITDA than before COVID-19. There were also reports that the company may be considering an IPO. Again, this is an investment theme that has worked very well for us.
CJ: I was very interested in the January fact sheet. You mentioned that you lowered the fixed rate on the fund’s high-yield exposure. This was after a rally held from November to December 2023. So what prompted that decision?
P.S: This may sound counterintuitive, since central banks are more likely to cut interest rates than raise them to increase floating rate exposure and reduce fixed rate exposure. But as with everything in financial markets, it’s not so much what central banks do next that matters, but what is already priced into the market. As a result, in January, the market was pricing in a significant rate cut by the central bank. If you look at inflation and some of the inflation data released this morning, we’re seeing wage growth in the UK of 6%, but we’re still a long way from the 2% target set by the central bank. So while we think a rate cut is possible, it won’t happen as quickly as the market was pricing in. So floating rate credit effectively looked much more interesting than fixed rate credit. Higher coupon. These coupons may go down slightly over time, but I think variable rate credit looks much more interesting, at least in the short term.
CJ: Peter, thank you so much for taking the time to talk to me.
P.S: Are you okay. Thank you Chris.
CJ: This is Christopher Johnson from Morningstar UK.
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